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In Defense of Passivity – the Proper Role of a Target's Management in Response to a Hostile Tender Offer

Published online by Cambridge University Press:  17 February 2009

Peter O. Mülbert  and
Birke Max
Peter O. Mülbert
Affiliation:
Professor of Law, Mainz University, Director of the Center for German and International Law of Financial Services, Mainz.
Birke Max
Affiliation:
LL.M. (University of Chicago), law clerk (Rechtsreferendar) at the Hanseatic Court of Appeals Hamburg.
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Extract

The Council of the European Union recently adopted a modified proposal for an EU Directive on takeovers. As a central feature the new proposal contains a provision imposing on the management of a target company a duty of passivity (Neutralitätspflicht) once a public bid for the shares of the target company has been made. This duty of passivity in the face of a hostile offer has been a key feature of the first proposal for an EU Takeover Directive in 1989 and the amended proposals of 1990, 1996, and 1997. It is a central element of the UK City Code on Takeovers and Mergers that from the beginning served as a model for the drafts of the EU Takeover Directive and can still be detected as such in the current proposal. The rule of passivity also found its way into the laws of many Member States that enacted takeover laws in anticipation of the imminent passing of a Takeover Directive. In Germany, a takeover statute is still missing. However, German corporate law scholars widely support the rule of passivity. Moreover, the rule of passivity is already in place in the non-binding German Takeover Code, a non-government voluntary regulation of takeovers to which about 60-70 % of the stock exchange listed companies in Germany have subjected themselves. Finally, the German government this year presented a draft proposal for a German Takeover Act that also contains a duty of passivity. Thus it seems fair to say that until very recently the rule of passivity has been a widely accepted, integral part of European takeover law.

Type
Articles
Information
European Business Organization Law Review (EBOR) , Volume 1 , Issue 3 , September 2000 , pp. 445 - 478
Copyright
Copyright © T.M.C. Asser Press and the Authors 2000

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References

1 The text of the proposed Directive as adopted by the Council is published in: Council of the European Union, Interinstitutional File (1995) 0341 (COD), Brussels, 21 June 2000, 8129/1/00 Rev. 1,DGCU.

2 Art. 9.

3 See General Principle 7 of the City Code; for a brief description of the City Code see Defriez, , “Takeover Regulation in the United Kingdom”, in: Rosen, Von and Seifert, (eds.), Die Übernahme börsennotierter Unternehmen [Takeovers of Stock Exchange Listed Companies] (Frankfurt 1999) 29Google Scholar; for a more detailed presentation of the City Code see Davies, , Gower's Principles of Modern Company Law, 6th ed. (London 1997) p. 772.Google Scholar

4 For a description of the early proposals of European takeover regulation see Reul, , Pflicht zur Gleichbehandlung der Aktionäre in privaten Kontrolltransaktionen [Duty of Equal Treatment of Shareholders in Private Sales of Control] (Tübingen 1991) p. 9.Google Scholar

5 E.g., Austria, Italy, and, as a non-EU Member State, Switzerland.

6 See, e.g., Hopt, , “Aktionärskreis und Vorstandsneutralität” [Composition of shareholders and neutrality of the management board], 22 Zeitschrift für Unternehmens- und Gesellschaftsrecht (1993) 534 at pp. 545–548CrossRefGoogle Scholar; id., “Europäisches und deutsches Übernahmerecht” [European and German takeover law], 161 Zeitschrift für das gesamte Handels- und Wirtschaftsrecht (1997) 368 at p. 391Google Scholar; Müulbert, , “Die Zielgesellschaft im Vorschlag einer Takeover-Richtlinie” [The target company in the proposal for a Takeover Directive], 8 Internationales Steuerrecht (1999) 83 at p. 88Google Scholar; Baums, , “Notwendigkeit einer gesetzlichen Übernahmeregelung” [The neccessity of a takeover law], in: Rosen, Von and Seifert, (eds.), supra n. 3, at pp. 175 et seq.Google Scholar; Pöotzsch, and Möllers, , “Das künftige Übernahmerecht” [The future takeover law], 54 Wertpapier-Mitteilungen, Sonderbeilage Nr. 2 zu Heft 31 (2000) 1 at p. 25.Google Scholar

7 Pötzsch and Möllers, supra n. 6, at p. 13.

8 Sec. 31; the full text of the draft proposal is available at <www.bundesfinanzministerium.de>.

9 See, e.g., Frankfurter Allgemeine Zeitung of 31 August 2000,20, of 13 September2000, 19, and of 11 November 2000, 23.

10 Kirchner, and Painter, , “Towards a European Modified Business Judgment Rule for Takeover Law”, 1 EBOR (2000) 353.Google Scholar

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12 See, e.g., Van, Aubel, Vorstandspflichten bei Übernahmeangeboten [Obligations of the management board concerning takeover bids] (München 1996) 155Google Scholar, (obligation of the management board) versus, e.g., Hopt, supra n. 6, at p. 547 (lack of competence). But see also Mulbert, supra n. 6, at p. 88 (the particularities of German stock corporation law mandate to discriminate between takeover bids leading to the formation of a group of companies and offers by “private” bidders).

13 Kirchner and Painter, supra n. 10, at p. 357.

14 Bebchuk, , “Toward Undistorted Choice and Equal Treatment in Corporate Takeovers”, 98Google Scholar

15 Harv. L. Rev. (1985) 1693 at p. 1696Google Scholar; id., “The Sole Owner Standard for Takeover Policy”, 17 J. Legal Stud. (1988) 197 at pp. 217 et seq.Google Scholar; Haddock, , Macey, , AND McChesney, , “Property Rights in Assets”, 73 Va. L. Rev. (1987) 701 at p. 704CrossRefGoogle Scholar in footnote 7; also see Schwartz, , “The Fairness of Tender Offer Prices in Utilitarian Theory”, 17 J. Legal Stud. (1988) 165 at pp. 171 et seq.CrossRefGoogle Scholar; Witt, , “Regelmäβige ‘Wasserstandsmeldungen’ – unverzichtbarer Bestandteil eines künftigen Über-nahmerechts” [Regular ‘Water Level Disclosure’ – An Indispensable Part of Future Takeover Law], 3 Neue Zeitschrift für Gesellschaftsrecht (2000) 809 at p. 811Google Scholar; Portolano, , “Shareholders' Approval of Defensive Tactics in Italy – A Legal and Economic Analysis”, International Review of Law and Economics, Dec. 2000 (forthcoming).Google Scholar

16 See Unocal v. Mesa Petroleum Co., 493 A. 2d 946 (Del. 1985).

17 Moran v. Household Intern., Inc., 500 A.2nd 1346 (Del. 1985); Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995).

18 For a definition of the term “poison pill” see Vechiolla, , Prudom, and Hamilton, , “Exposing the Corporate Vampire”, 31 Long Range Planning (1998) 659 at p. 668CrossRefGoogle Scholar; also see Hamilton, , Cases and Materials on Corporations including Partnerships and Limited Liability Companies, 6th ed. (St. Paul, Minn., 1998) p. 1042.Google Scholar

19 506 A.2d 173 (Del. 1985). Subsequent decisions of the court had to deal with the question of when the breakup of a company is unavoidable and the company is thus in the “Revlon mode”, see Paramount Communications v. Time Inc., 571 A.2d 1140 (Del. 1989) and Paramount Communications v. QVC Network Inc., 637 A.2d 34 (Del. 1994).

20 “Dead hand” poison pills may be removed only by the directors in place before a bid begins, “no hand” poison pills may not be removed at all; see Coates, , “Measuring the Domain of Mediating Hierarchy: How Contestable are U.S. Public Corporations?”, 24 J. Corp. L. (1999) 837 at p. 853.Google Scholar

21 Quickturn Design System Inc. v. Mentor Graphics Corp, C.A. No.16584 (Del. 1998); also see Camody v. Toll Bros. Inc (24 July 1998) by the Delaware Court of Chancery, Coates, supra n. 20, at p. 854.

22 Kirchner and Painter, supra n. 10, at p. 397.

23 As to the following, see Kirchner and Painter, ibid., at p. 361.

24 For a more comprehensive description see Romano, , “A Guide to Takeovers: Theory, Evidence, and Regulation”, 9 Yale J. on Reg. (1992) 119.Google Scholar

25 For examples of operational synergies (economies of scale and/or scope, network effects) see Kuhner, , “Zum Sinn und Zweck von Unternehmenszusammenschlüssen aus gesamtwirtschaftlicher Sicht” [On the desirability of corporate mergers from a social perspective], Betriebswirtschafiliche Forschung und Praxis (2000) 333 at pp. 336 et seq.Google Scholar

26 For this view see Easterbrook, and Fischel, , The Economic Structure of Corporate Law (Cambridge, Mass. 1991) Chs. 5 and 7Google Scholar; id., “The Proper Role of a Target's Management in Responding to a Tender Offer”, 94 Harv. L Rev. (1981) 1161Google Scholar; for a separation of the “corporate restructuring” and the agency cost explanation see Instefjord, , “The Market for Corporate Control and the Agency Paradigm”, European Financial Review (1999) 1.Google Scholar

27 Jensen, , “The Takeover Controversy: Analysis and Evidence”, in: Coffee, , Lowenstein, and Rose-Ackermann, (eds.), Knights, Raiders & Targets: The Impact of the Hostile Takeover (New York 1988) 314Google Scholar; for an explanation resting on the reduction of agency costs in going private transactions, see Easterbrook and Fischel 1991, supra n. 26, at pp. 113-115.

28 See Berger, Philip G. and Ofek, Eli, “Bustup Takeovers of Value-Destroying Diversified Firms”, 51 J. Fin. (1996) 1175.CrossRefGoogle Scholar

29 There seem to be exceptions to this rule (that shareholders do not benefit from corporate level diversification) in the banking industry. Also, there may be cases when it is impossible for shareholders to diversify their portfolio and it therefore makes sense for them to diversify at the corporate level, see Romano, supra n. 24, at pp. 146-147; still it seems that generally speaking diversification belongs in the “empire-building” category, see Berger and Ofek, supra n. 28, at p. 1201.

30 The theory goes back to Roll, , “The Hubris Theory of Corporate Takeovers”, 59 J. Bus. (1986) 197CrossRefGoogle Scholar; see also Romano, supra n. 24, at pp. 150-151 (relating this explanation to the winner's curse phenomenon in sealed-bid auctions (where “winning is bad news”)).

31 See the description of these theories in Romano, supra n. 24, at pp. 133-143.

32 Note however that synergistic gains can also be achieved through friendly takeovers, for a theoretical analysis of the choice between friendly and hostile acquisitions from the perspective of the bidder see Schnitzer, , “Hostile versus Friendly Takeovers”, 63 Economica (1996) 37.CrossRefGoogle Scholar

33 Romano, supra n. 24, at p. 127.

34 Morck, , Shleifer, and Vishny, , “Do Managerial Motives Drive Bad Acquisitions?”, 45 J. Fin. (1990) 31CrossRefGoogle Scholar; for a summary of more evidence supporting the synergy theories see Romano, supra n. 24, at pp. 125-129.

35 Martin, and McConnell, , “Corporate Performance, Corporate Takeovers, and Management Turnover”, 46 J. Fin. (1991) 671.CrossRefGoogle Scholar

36 Coates, supra n. 20, at p. 859.

37 Morck, , Shleifer, and Vishny, , “Characteristics of Hostile and Friendly Takeovers”, in: Auer-bach, , (ed.), Corporate Takeovers: Causes and Consequences (Chicago 1988) 101Google Scholar; for a confirmation of this result for the UK see Weir, , “Corporate Governance, Performance and Takeovers: An Empirical Analysis of UK Mergers”, Applied Economics (1997) 1467.Google Scholar

38 Romano, supra n. 24, at p. 125 footnote 17; also see Coates, supra n. 20, at p. 859 (citing Mikkelson, and Partch, , “The Decline of Takeovers and Disciplinary Managerial Turnover”, 44 J. Fin. Econ. (1997) 205 at p. 209CrossRefGoogle Scholar who find that the decrease in takeover activity during the years 1989 through 1993 correlated with decreased levels of managerial turnover in the firms in the lowest performing quartile of performance).

39 Safiedinne, and Titman, , “Leverage and Corporate Performance: Evidence from Unsuccessful Takeovers”, 54 Journal of Finance (1999) 547CrossRefGoogle Scholar. The authors also find that the negative effects of termination are mitigated when target managers implement reforms (in particular increasing leverage) similar to those planned by the “raider”, see p. 578.

40 Brown, and Medoff, , “The Impact of Firm Acquisitions on Labor”, in: Auerbach, (ed.), supra n. 37, at p. 9.Google Scholar

41 Blackwell, , Marr, and Spivey, , “Plant Closing Decisions and the Market Value of the Firm”, 26 J. Fin. Econ. (1990) 277 at p. 283.CrossRefGoogle Scholar

42 See Romano, supra n. 24, at pp. 133-136 on tax savings and Asquith, and Wizman, , “Event Risk, Covenants, and Bondholder Returns in Leveraged Buyouts”, 27 J. Fin. Econ. (1990) 195.CrossRefGoogle Scholar

43 Easterbrook and Fischel 1991, supra n. 26, at p. 199.

44 Hechler, , “Towards a More Balanced Treatment of Bidder and Target Shareholders”, Colum. Bus. L.Rev. (1997) 319 at p. 370Google Scholar (pleading for more protection of bidder shareholders instead of more protection of target shareholders); Kuhner, supra n. 25, at p. 342.

45 E.g., Jarrell, and Poulsen, , “The Returns to Acquiring Firms in Tender Offers: Evidence from Three Decades”, 18 Fin. Management (1989) 12Google Scholar (finding significantly positive returns to bidders in the 1960s and 1970s and insignificantly negative abnormal returns in the 1980s).

46 See Brealy, and Myers, , Principles of Corporate Finance, 5th ed. (New York 1996) p. 933.Google Scholar

47 Easterbrook and Fischel 1991, supra n. 26, at p. 199; Romano, supra n. 24, at p. 169.

48 Jarrell, , “The Wealth Effects of Litigation by Targets: Do Interests Diverge in a Merge?”, 28 J. Law & Econ. (1985) 151CrossRefGoogle Scholar. They do not fall instantaneously, which can be explained by the chance that another bid will follow; the fact that the price falls to below the pre-bid price indicates that shareholders found positive value in the possibility of a future takeover, that they subsequently discount.

49 Hall, , “The Effect of Takeover Activity on Corporate Research and Development”, in: Au-erbach, (ed.), supra n. 38, at p. 69Google Scholar; Vechiolla, Prudom and Hamilton, supra n. 18, at p. 660. Moreover, the very high recent valuations of the stocks of technology and internet corporations suggest that the markets all but underprice the future. For a skeptical view on these valuations, though, see Shiller, , Irrational Exuberance (Princeton 2000).Google Scholar

50 Han, Chan Su, Martin, John D. and Kensinger, John W., “Corporate Research and Development Expenditures and Share Value”, 26 J. Fin. Econ. (1990) 255.Google Scholar

51 Bradley, , Desai, and Kim, , “Synergistic Gains from Corporate Acquisitions and their Division between Stockholders of Target and Acquiring Firms”, 21 J. Fin. Econ. (1988) 3.CrossRefGoogle Scholar

52 Romano, supra n. 24, at p. 149 footnote 123.

53 Berger and Ofek, supra n. 28, at pp. 1177 et seq. find a higher probability of a takeover after value decreasing diversification.

54 Bradley, Desai and Kim, supra n. 51, at p. 13; Servaes, , “Tobin's q and the Gains from Takeovers”, 46 J. Fin. (1991) 409CrossRefGoogle Scholar; Kuhner, supra n. 25, at p. 341.

55 Franks, and Harris, , “Shareholder Wealth Effects of Corporate Takeovers”, 23 J. Fin. Econ. (1989) 225 at p. 247CrossRefGoogle Scholar; Weir, supra n. 38, at p. 1473 finds that targets have suboptimal governance structures and are underperformers in terms of absolute profitability.

56 Hopt 1997, supra n. 6, at p. 370 states that there is beginning to be some empirical research on this, but does not quote any; anecdotal evidence from three hostile takeover attempts in Germany can be found in Franks, and Mayer, , “Bank Control, Takeovers and Corporate Governance in Germany”, 22 J. Banking & Fin. (1998) 1385.CrossRefGoogle Scholar

57 Speckbacher, , “Shareholder Value und Stakeholder Ansatz” [Shareholder value and stakeholder theory of the firm], 57 Die Betriebswirtschaft (1997) 630 at p. 632.Google Scholar

58 To the contrary, a recent study by Eugene Fama on international evidence for a two-factor-model: Fama, , “Value versus Growth: The International Evidence”, 53 J. Fin. (1998) 1975CrossRefGoogle Scholar suggests the efficiency of at least some of the continental European markets.

59 E.g., in the above-mentioned failed attempt by Krupp to takeover Thyssen, see Hopt 1997, supra n. 6, at p. 370.

60 For a description of the activities of CalPERS in Germany see Andre, , “Cultural Hegemony: The Exportation of Anglo-Saxon Corporate Governance Ideologies to Germany”, 73 Tul. L. Rev. (1998) 69.Google Scholar

61 Berle, and Means, , The Modern Corporation and Private Property (1933).Google Scholar

62 See Vechiolla, Prudom and Hamilton, supra n. 18, at pp. 661 et seq. for a detailed discussion of various defensive techniques; for another enumeration of defensive techniques see Buddenbrock, Von, “Abwehrstrategien gegen feindliche Übernahmen” [Defensive strategies against hostile takeovers], in: Rosen, Von and Seifert, (eds.), supra n. 3, at pp. 279 et seq.Google Scholar

63 The effect of the announcement of defensive strategies on the stock price is not quite clear though, see for an opposite evaluation, e.g., Coates, supra n. 20, at p. 852 and footnote 87 (stating that poison pills had no effect on stock prices) and Vechiolla, Prudom and Hamilton, supra n. 18, at pp. 661 et seq. (describing negative wealth effects of several defensive measures).

64 See the exchange between Easterbrook, and Fischel, , “Auctions and Sunk Costs in Tender Offers”, 35 Stan. L Rev. (1982) 1CrossRefGoogle Scholar and Bebchuk, , “The Case For Facilitating Competing Tender Offers: A Reply and Extension”, 35 Stan. L Rev. (1982) 23CrossRefGoogle Scholar and Gilson, , “Seeking Competitive Bids Versus Pure Passivity in Tender Offer Defense”, 35 Stan. L. Rev. (1982) 51.CrossRefGoogle Scholar

65 Easterbrook and Fischel, supra n. 65, at pp. 1 et seq.

66 Bebchuk, supra n. 64, at p. 23; Gilson, supra n. 65, at p. 51.

67 Supra n. 8.

68 Monti, , “Vorschlag für eine Richtlinie über Übernahmeangebote” [Proposal for a Directive on Takeovers] in: Rosen, Von and Seifert, , supra n. 3, at p. 25Google Scholar; Potzsch and Mollers, supra n. 6, at p. 10.

69 See Haddock, Macey and McChesney, supra n. 14, at p. 701 for an elaborate exposition of this argument.

70 Portolano, supra n. 14 (forthcoming).

71 See the empirical study by Daines, and Klausner, , Do IPO charters maximize firm value? Anti-takeover Protection in IPOsGoogle Scholar, Boalt Hall School of Law, John Olin Program in Law and Economics, Working Paper Series, Working Paper 99/14 who even find that 50% of all firms at the IPO stage adopt rather mild anti-takeover devices in their charters; they also find that firms do not implement serious takeover impediments at this stage; for the contrasting view that firms go public in an easy-to-acquire manner see Easterbrook and Fischel 1991, supra n. 26, at pp. 204-205.

72 Easterbrook and Fischel, supra n. 65, at p. 8.

73 But see ibid.

74 Bebchuk, supra n. 64, at p. 28 enumerates other factors that increase or decrease a company's chances of becoming a target.

75 Kirchner and Painter, supra n. 10, at pp. 357 et seq.

76 Bergström, Högfeldt, Macey and Samuelsson, supra n. 11, at pp. 510 et seq.; Haddock, Macey and McChesney, supra n. 14, at 701.

77 The fact that the first bidder offers a price above the current market price indicates that he values the company's resources higher than their current owners, presumably because he will be able to employ them more efficiently. Easterbrook and Fischel, supra n. 65, at pp. 13 et seq. argue that assets will end up with the highest valuing user in the long run anyway. They remark that this may not lead to higher transaction costs because after many takeovers (at least in the US in the 1980s) the targets were dismembered and the individual parts sold separately; therefore there were multiple sales of the assets in any case. It still seems more plausible that transaction costs in subsequent takeovers are higher than in an auction.

78 See Bebchuk, , “The Case For Facilitating Competing Tender Offers”, 95 Harv. L Rev. (1982) 1038CrossRefGoogle Scholar who is at the same time a champion of a rule of auctioneering and a vigorous opponent of allowing target management to resist hostile bids; see also Bebchuk, and Ferrell, , “Federalism and Corporate Law: The Race to Protect Managers From Takeovers”, 99 Colum. L. Rev. (1999) 1168.CrossRefGoogle Scholar

79 For the argument against such regulation see Easterbrook and Fischel 1991, supra n. 26, Ch.7.

80 Haddock, Macey and McChesney, supra n. 14, at p. 702.

81 Coates, supra n. 20, at p. 859 notes the significant drop in takeover activity in the years from 1989 to 1993.

82 For a definition of the prisoner's dilemma game see Baird, , Gertner, and Picker, , Game Theory and the Law (Cambridge, Mass. 1994) p. 314Google Scholar; for a discussion of the “takeover game” as a prisoner's dilemma see Schwartz, supra n. 14 at pp. 170 et seq.

83 The term is not used in a strictly technical sense. Instead, it denotes all possibilities for a majority to “buy out” the minority, e.g., the German “Eingliederung” according to S. 319 Stock Corporation Act. For a critical assessment of the valuation methods applied by Delaware courts in appraisals see Ravid, and Spiegel, , “Toehold Strategies, Takeover Laws and Rival Bidders”, 23 J. of Banking & Finance (1999) 1219 at p. 1223.CrossRefGoogle Scholar

84 Bebchuk 1982, supra n. 78, at p. 1039. A simple numerical hypothetical may help to illustrate this point: Suppose that the shares of the target company are valued at 100 before the bid. The bidder then makes an offer for 51% of the shares for 110. Target shareholders expect the bidder to steer the target in a way that does not maximize the interests of target shareholders but the bidder's own interest (put differently, the bidder might loot the target company). Thus, target shareholders expect the value of their shares as minority shares to plunge to 95 (102) after the bid succeeds. Alternatively, the shareholders might expect the bidder to freeze them out at a price of 100. Even if shareholders believe their shares to be worth 115 they might feel inclined to tender if they cannot co-ordinate. That is, if they expect the other shareholders to accept the bid their best strategy is to accept it as well.

85 See Bebchuk 1988, supra n. 14, at p. 205 (suggesting that in the course of a takeover shareholders might receive new information during non-trading hours that causes them to value their shares higher than the market price). On a more fundamental note, individual shareholders may value their shares differently, for example, because of different marginal tax rates, different acquisition prices or different perceptions of management's strategy and ability. See, e.g., Bergström, Högfeldt, Macey and Samuelsson, supra n. 11; Stout, , “Are Takeover Premiums Really Premiums? Market Price, Fair Value, and Corporate Law” 99 Yale L J. (1990) 1235CrossRefGoogle Scholar at pp. 1244 et seq. and pp. 1264 et seq. (1990). The contrary assertion by Easterbrook and Fischel 1991, supra n. 26, at p. 180 rests on the premise that the more optimistic investors will continue buying shares as long as their marginal utility is higher than the market price. However, this line of reasoning would only be valid if investors were not subject to credit rationing, respectively could borrow unlimited amounts of funds (see Mülbert, , Aktiengesellschaft, Unternehmensgruppe und Kapitalmarkt, 2nd ed. (München, 1996) p. 146 footnote 378).Google Scholar

86 Cf. the literature supra n. 48.

87 As to this possibility, see the text supra n. 86.

88 But see Stout, supra n. 86, at p. 1269 (claiming that because of differing shareholder valuations the call for legal rules prohibiting target management from pursuing defensive tactics are seriously flawed).

89 Bebchuk 1988, supra n. 14, at p. 203.

90 Supra part 5.

91 See infra part 7 in more detail.

92 Art. 5 of the proposed Takeover Directive (supra n. 1) respectively S. 33-39 of the draft proposal of a German Takeover Statute (supra n. 8).

93 Kirchner and Painter, supra n. 10, at pp. 386 et seq. argue that the rule of neutrality would come in a package that would bring along other complicated regulation.

94 Supra section 5.1.

95 For one, it simply forces bidders to amass larger funds, because they have to be prepared not only to purchase 51% (or whatever they deem necessary to achieve control), but possibly up to 100% of the outstanding shares of the target. This may also mean taking on higher risk and higher interest rates. Moreover, the price required to induce the marginal shareholders to tender in a partial bid may be lower than that needed to induce all shareholders. Such an upward sloping supply curve may be due to different factors pointed out supra n. 85 (with further references). Furthermore, the mandatory bid-rule may encourage shareholders to hold out for higher prices in the beginning (the first voluntary bid), knowing that the bidder will be required to make a mandatory bid to them anyway, see Bergstrom, Hogfeldt, Macey and Samuelsson, supra n. 11, at pp. 517-518.

96 For a formal analysis comparing the effects of “equal opportunity rules” like the mandatory bid rule with market rules for private sales of control see Bebchuk, , “Efficient and Inefficient Sales of Corporate Control”, 109 Quar. J. Econ. (1994) 957.CrossRefGoogle Scholar

97 See Easterbrook and Fischel 1991, supra n. 26, at pp. 126-127.

98 Bergström, Högfeldt, Macey and Samuelsson, supra n. 11, at p. 518 footnote 72; it is quite probable for different reasons that the blockholder will not part with its shares unless a control premium is paid, see Bebchuk, supra n. 97, at pp. 957 et seq.

99 The draft proposal of the German Takeover Act (supra n. 8) allows for the offer price to be 15% lower than the highest pre-bid price paid by the bidder (S. 39 and S. 16, para. 3).

100 Rau-Bredow, , “Ökonomische Analyse obligatorischer Übernahmeangebote” [Economic analysis of mandatory bids], 59 Die Betriebswirtschaft (1999) 763 at p. 774.Google Scholar

101 See Rau-Bredow, ibid., at pp. 763 et seq. and Ravid and Spiegel, supra n. 84, at p. 1237 for favorable assessments of the mandatory bid-rule; but see also Bergström, Högfeldt, Macey and Samuelsson, supra n. 11, at pp. 516 et seq. for a negative evaluation.

102 Also, it should not be forgotten that the risk of a breach of an implicit promise is a mutual one: employees might receive a higher salary than their actual value to the corporation during the starting phase of the employment relationship when the employee is educated internally. The firm then is vulnerable to the employee's leaving the firm after he has been trained because then he may be able to earn more elsewhere.

103 See nn. 41-43 and accompanying text.

104 Haddock, Macey and McChesney, supra n. 14, at p. 713 footnote 26.

105 Vechiolla, Prudom and Hamilton, supra n. 18, at p. 665.

106 Borokhovich, , Brunarski, and Parrino, , “CEO Contracting and Anti-takeover Amendments”, 52 J. Fin. (1997) 1495 at p. 1515CrossRefGoogle Scholar; also see Vechiolla, Prudom and Hamilton, supra n. 18, at p. 669 footnote 18 (stating that there is no evidence that takeover protections encourage long-term investment or managerial risk-taking).

107 Kirchner and Painter, supra n. 10, at pp. 384 et seq.

108 See the statements by the Member of the European Parliament, Lehne, Klaus-Heiner, in the Frankfurter Allgemeine Zeitung, 13 September 2000, 19.Google Scholar

109 Roe, , “Special Symposium Issue: German codetermination and German securities markets”, Colum. Bus. L. Rev. (1998) 178Google Scholar; Adams, “Was spricht gegen eine unbehinderte Über-tragbarkeit der in Unternehmen gebundenen Ressourcen durch ihre Eigentümer?” [What is the argument against uninhibited transferability of corporate resources by their owners?], 35 Die Aktiengesellschaft (1990) 243 at p. 250Google Scholar calls codetermination the most effective “Giftpille” (poison pill).

110 Kirchner and Painter, supra n. 10, at p. 390.

111 Ibid., at p. 391.

112 As to the political background of state anti-takeover legislation in the US see Romano, , “The Political Economy of Takeover Statutes”, 73 Va. L. Rev. (1987) 111.CrossRefGoogle Scholar

113 See Schwartz, supra n. 14, at pp. 183 et seq. for a discussion of “take it or leave it offers” from the perspective of dispersed shareholders.

114 It is not easy to conceive, though, why shareholders should spend large amounts of money on sophisticated defensive strategies when they can simply and cheaply opt not to tender. One might argue that the passing of a shareholder resolution mitigates the collective action problem that the individual shareholder faces when deciding whether to tender his shares or not: If the proposal for authorizing defensive measures falls through this sends a clear signal to the dissenting minority shareholders to hand in their shares as well. However, this line of reasoning presupposes that most of the shares take part in the vote, and that the adoption of the proposed resolution requires a qualified majority. Otherwise, if the vote does not fulfill both conditions the informational content of its outcome for dissenting shareholders is weak. Furthermore, far superior mechanisms for overcoming this kind of collective action problem are known, namely (1) imposing a duty on the bidder to disclose the number of shares already tendered on a daily basis, and/or (2) allowing shareholders still to accept the offer within a certain period after the expiration of the offer. The draft proposal of a German Takeover Act (supra n. 8) contains both such provisions (S. 19, para. 3 and S. 25, para. 1).

115 Kirchner and Painter, supra n. 10, at p. 356 stress this point when discussing the possibility of a shareholder vote to allow for defensive measures. Their argument loses persuasive power, when they emphasize elsewhere that shareholders can prohibit managerial defense by a shareholder vote and argue that in light of modern communication technologies holding a general assembly will not be much of a problem, see id., supra n. 10, at p. 356 n. 13 and at pp. 382 et seq. For reasons of logistics, it seems more appropriate to shift the burden of organizing the shareholder assembly on takeover defense to management.

116 S. 19, para. 2,4 of the draft proposal of a German Takeover Act (supra n. 8).

117 Supra n. 8.

118 Ibid.